Investments in carbon markets can offer attractive and uncorrelated performance potential as well as direct climate impact.
Compliance carbon allowances are an emerging asset class that has recently garnered significant attention with its strong performance. Carbon allowances are expected to continue to rise in value as demand remains consistent but supply is reduced over time.
Compliance carbon is based on cap-and-trade programs, also known as Emissions Trading Systems (ETS), which regulate emissions for mandated industries in their respective jurisdictions, forming a new type of investable asset class called carbon allowances or carbon credits.
KraneShares has several funds in its suite of climate ETFs providing exposure to compliance carbon. These funds include the KraneShares Global Carbon Strategy ETF (KRBN ), the KraneShares European Carbon Allowance Strategy ETF (KEUA ), and the KraneShares California Carbon Allowance ETF (KCCA ).
Out of the three funds, KRBN provides the broadest exposure to carbon allowances, tracking all major global cap-and-trade programs. These programs include the European Union Allowances (EUA), California Carbon Allowances (CCA), and the Regional Greenhouse Gas Initiative (RGGI).
Meanwhile, KEUA offers targeted exposure to the European Union Allowances (EUA) program. The EUA program is the world’s oldest and most liquid carbon allowance market.
KCCA offers targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. The CCA program is one of the fastest-growing carbon allowance programs globally.
How Investments in Carbon Markets Provide Diversification
Carbon markets have historically shown low correlations to other asset classes, making them an attractive portfolio diversifier. Since 2014, carbon allowances have maintained a correlation of 0.3 or lower to other major asset classes, according to Data from Bloomberg and IHS Markit as of March 31.
KraneShares believe these correlation benefits will continue as carbon prices increasingly reflect the policy tightening schedule more so than economic factors. This effectively means a carbon allocation, despite its own volatility, can bring down overall portfolio risk.
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